U.S. equities were higher last week, with the S&P 500 ending Friday with its best daily performance since November 30th. Value outperformed growth, while all sectors except for healthcare and energy ended the week higher. Treasuries ended the week stronger, as the 10-year yield fell more than 30 basis points from the December close. Specifically, the 10-year U.S. Treasury bond closing around 3.56% on Friday, down sharply from 3.88% at the end of the previous week. The dollar index ended higher after declining five of the last six weeks of trading. The A Friday rally followed an encouraging jobs report, and the major indices started the year on positive note. Communication services stocks like Charter Communications, Netflix, and Facebook parent Meta Platforms led the gains. The trading volumes was subdued over most of the week. Flows into mutual funds and related investment products showed outflows from equities, while fixed income saw inflows
“Historically, January’s stock market performance has been a strong indicator of what may be in store for the rest of the year. In fact, 71% of the time since 1929, the S&P 500 has posted a positive return for the year after gaining ground in January or has gone on to post an annual loss when the market has declined in the first month, according to S&P Dow Jones Indices.”
Despite the risk of an economic recession, the U.S. labor market remains health as wage pressures ease. Data released on Friday showed that 223,000 new jobs were added in December. Employment gains were led by education, health services, leisure and hospitality. Another positive from the report is that the prime-age employment-to-population ratio increased to 80.1% in December from 79.7% in November. Overall, the economy generated 4.5 million jobs in 2022—the second-highest annual total on record, trailing only the 6.7 million added in 2021. The smaller decline in average hourly earnings month over month shows that wage growth is slowing. We expect that wage growth will slow more in upcoming months. This report won’t change the plans of the Federal Reserve to continue hiking interest rates later this year to slow inflation.
Wednesday’s FOMC minutes release emphasized U.S. Federal Reserve officials’ commitment to keep interest rates high to combat inflation. Officials cautioned that restoring price stability could be complicated by “an unwarranted easing in financial conditions, especially if driven by a misperception by the public” As inflation pressures spread globally, the Bank of Japan (BOJ) moved its inflation targeting, marking the end of global negative yielding debt for central banks worldwide despite the risk of slowing economic growth. Japan’s stock market returns were negative for the week, with the Nikkei Index down 0.46% and the broader TOPIX Index falling 0.84%. Concerns about the global monetary policy and recessionary fears continued to have negatively effect on sentiment.
As major financial institutions (Bank of America, JPMorgan, Goldman Sachs) prepare to open quarterly earnings season Friday, most analysts have been scaling back their expectations. Over the past three months, analysts reduced their fourth-quarter earnings-per-share estimates for companies in the S&P 500 by an average of 6.5%, according to FactSet. That figure exceeds the 3.8% average reduction seen prior to earnings seasons over the past 20 years.
Shares in Europe surged as data indicated that the pace of inflation has slowed. The cost of natural gas also fell to levels last seen before Russia invaded Ukraine. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 4.60% higher. Major stock indexes also advanced. Eurozone inflation slows below 10%; French central banker still sees higher rates. A decline in energy price increases helped push eurozone inflation below 10% for the first time in two months, official data showed. Consumer prices in December rose 9.2% year over year, below a FactSet consensus estimate of 9.7%.
Chinese equities rose according to reports that Hong Kong would reopen its border to mainland China and that Beijing was considering relaxing curbs on borrowing for the ailing property sector. The Shanghai Composite Index advanced 2.21% and the blue-chip CSI 300 gained 2.82%, the biggest gains in weeks. As China reopens its economy, COVID infections have spiked. Analysts “expect the recent rise in infections in China to be a headwind to growth in the near term, disrupting manufacturing and supply chains and worsening labor shortages. At the same time, they expect the reopening to significantly benefit growth not only domestically but also globally over the longer term. We’re closely monitoring the rise of infections in China and its impact on growth and government policy.”
Equity and bond market volatility will remain elevated until there’s a sustained decrease in inflation, and the duration of higher rates is more certain as markets become comfortable with a “data-dependent” Fed that’s now focused on the cumulative effects of rate hikes. We remain defensive in our positioning, and we’d look for opportunities to upgrade portfolios during market weakness. For equities, we continue to favor U.S. Large Cap exposure. Within U.S. Large Caps, we favor segments exhibiting a defensive tilt toward quality, yield and lower cyclicality. We remain defensive in our credit positioning, with at benchmark duration and higher in credit quality. We expect credit spreads to remain wide to account for recession risks.
A Consumer Price Index report scheduled to be released on Thursday will show whether the recent moderation in inflation extended into December. In November, inflation rose at an annual 7.1% rate, marking the smallest year-over-year increase since December 2021.